Inflation might be a major issue for Pakistan in 2021. However, thanks to a double dosage of monetary tightening provided near the end of 2021, inflationary pressures could lessen in 2022.
The government, on the other hand, will have a number of significant issues, including maintaining economic growth momentum, managing its budget balance, and reducing the current account deficit. Even before the interest rate hike of 250 basis points between November 22nd and December 15th, a gas and power deficit had begun to stifle industrial production growth. (During July-October, large-scale industrial production growth was less than 3.6 percent year over year.)
The current account deficit for July-November is 5.3 percent of GDP, which is alarmingly high. However, limiting import growth through tight monetary policy should help to alleviate the current account deficit “to some extent.” However, due to demand compression following monetary tightening and an irregular supply of energy to industry, economic growth in 2022 is expected to weaken. The decelerated growth rate of consumer credit (excluding mortgage finance — courtesy to the government’s continuing Naya Pakistan Housing Scheme) would be an early harbinger of the approaching compression in aggregate demand.
Inflation, on the other hand, may not be as severe in 2022 as it was in 2021. The price of international fuel oil has already begun to fall. Furthermore, the global economy is growing at a slower pace than projected, implying that oil prices are unlikely to rise sharply.
This, together with a predicted reduction in the current account deficit, should reduce the pressure on foreign currency rates in 2022 compared to 2021. Inflationary pressures on imports will be reduced as a result. Overall inflation is predicted to begin dropping in the second quarter of 2022, if not sooner, due to lower imported inflation and slower aggregate demand growth as a result of monetary tightening. (Consumer inflation climbed to 11.5 percent year over year in November 2021.) However, if the current energy crisis continues, energy goods become more expensive on a regular basis, domestic and foreign food prices rise, and necessary item prices are not managed efficiently, inflation may become intractable. In that case, the SBP should continue to tighten monetary policy, with modest inflation easing beginning in the second half of 2022. (ie the first half of 2022-23).
Inflation in 2021 had a troubling feature in that the poorer sections of our society had to deal with a higher amount of it. Yearly inflation, as assessed by the Sensitive Price Index (which uses a basket of the most basic daily items), reached double digits in February 2021 and never returned to a single digit in the following nine months. In November 2021, it reached a new high of 17.4%.
It was feasible to keep prices of some of the 51 most important goods in the SPI basket (such as wheat flour, rice, milk, sugar, and pulses) in check by strictly enforcing regulations against overpricing and unfair market prices. Provincial governments, on the other hand, have failed to do so. The federal government depended on one package after another to provide assistance to consumers. Such packages, which have become more of a political stunt than anything else in Pakistan, never achieve their goals. The consumer relief packages for 2021 were no different.
The federal government restarted borrowing from the central bank, which contributed to greater inflation in 2021. According to the latest State Bank of Pakistan (SBP) figures, such borrowing (basically more currency printing) will total Rs603.7 billion between July 1 and December 10, 2021.
The government has rather retired the central bank’s debt on a net basis in the last two fiscal years — Rs83 billion in 2019-20 and almost Rs1.038 trillion (repeat trillion) in 2020-21.
On the International Monetary Fund’s (IMF) request, the parliament has failed to pass a law prohibiting the federal government from borrowing from the SBP. The imposition of a full ban on the government borrowing from its own central bank is ludicrous. As a result, all political parties and a large number of economists are opposing this move for the sake of Pakistani sovereignty.
This, as well as a few other conditions, have been attached by the IMF to the resumption of its stalled balance of payments support funds. As a result, the problem cannot be postponed indefinitely. The two parties may soon find a more gracious solution to this complex problem. The government’s borrowing from the central bank may not be permanently halted, but it could be limited and conditional on the government meeting certain fiscal discipline requirements. This means that, starting in 2022, the SBP will be able to battle inflation by tightening monetary policy without having to worry about the government borrowing from the SBP impeding its actions.
Isn’t this going to make the government even more reliant on private banks? Without a doubt. Banks were also setting Treasury Bill and Bond rates at a time when the government was in severe need of cash and couldn’t borrow from the central bank. This was done before the double dosage of monetary tightening was implemented.
Recognizing the potential damage that bank behaviour poses to the economy, the SBP has begun pouring liquidity into the system through open market operations, not just for a week or two, but for two months. A sufficiently liquid money market could assist the government in borrowing from banks at rates that are not artificially inflated by “greedy” banks.
As a result, the cost of the government’s domestic borrowing, which contributes to the increase of the fiscal deficit, would be kept in check. Inflation management through monetary policy will see some fascinating breakthroughs in the year 2022.
Source:
https://www.dawn.com/news/1667387/hoping-for-the-best
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